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SURVEY
Ital. J. Food Sci., vol. 26 - 2014 451
- Keywords: agricultural portfolio diversication, farmer choices, supply chain, growth and share matrix, supply tables,
secondary production -
DOES SMART AGRICULTURE GO DOWNSTREAM IN
THE SUPPLY CHAIN?
T.F.M. CHANG*, M. DROLI and L. ISEPPI
University of Udine, Department of Civil Engineering and Architecture, Section of Economics and
Landscape, Via delle Scienze 206, 33100 Udine, Italy
*Corresponding author: chang@uniud.it
ABSTRACT
Nowadays it seems to be imperative for smart farms to go downstream in the Supply Chain
(SC) to supplement the revenues of their underlying product sales. Using the well-structured da-
tabase of Eurostat Supply tables for EU-27, this study intends to verify what products the Agri-
cultural sector is offering beyond its core business activity to diversify its portfolio. The findings
demonstrate that Agriculture is going downstream in the SC, predominantly moving towards its
traditional activities: food processing, agro-tourism, and recreation. Green energy is the newcom-
er. Smart farmers should innovate in the mainstream of their secondary activities, using the lev-
erage of lucrative activities and rethinking their vertical integration.
452 Ital. J. Food Sci., vol. 26 - 2014
INTRODUCTION
Research on Food Supply Chain (FSC) entails
various difficulties. Prevailing among these is
the quantification of the production value ob-
tained by agriculture from outside its core ac-
tivities, such as from: food processing, accom-
modation and food services, wholesale and re-
tail, and other services. These concerns are gen-
eral problems that likewise involve every other
industry. When evaluations are done, they of-
ten appear to be very partial (being limited to a
specific product e.g. an organic one), unstruc-
tured (e.g. applying un-standardised and non-
homologated classifications), and suffering from
duplication (e.g. the turnover from direct sales
which is already included in the value of prima-
ry agricultural materials, as noted in KEAFSEY
et al. (2013). What is needed, therefore, is the
provision of a complete, standardised and cer -
tified database, without any duplication, spe-
cifically such as the one described hereafter.
Over the last 5 years, Eurostat has dissemi-
nated a new set of input-output tables, named
Supply and Use, in conformity with NACE and
CPA classifications within the framework of the
ESA-95 system, and harmonised with the UN-
System of National Accounts and the ISIC clas-
sification (EUROSTAT, 2008). In this database,
the Supply table provides the value of core busi-
ness production for each industry, as well as of
secondary productions that are, in the main,
core competences of other sectors. Contextu-
ally, the Supply table provides the value of a
group of homogeneous products (e.g. Agricul-
tural products) supplied to the economy as a
whole by each sector, broken down by the in-
dustries that deliver it as a principal product.
Two annual time series have been utilised: the
first encompasses the 2000-2007 period, and
was compiled using the NACE rev. 1.1 classifi-
cation, while the second has recently been pub-
lished (in 2013) according to the NACE rev. 2
classifications, and contains EU-27 and EA-17
tables for 2008-2009, as well as with data limit-
ed to 12 EU countries for 2010. This study uti-
lises the first series for an inter-temporal com-
parison (2000-2007), and the second series for
an up-to-date evaluation relating to the last
available year (2009).
The study objectives are as follows: 1) to quan-
tify the value of activities included in the Agri-
culture portfolio that are classified by Eurostat
as primary and secondary production, which
pertain to the core business of other industries;
2) to create a Boston Consulting Group (BCG)
Growth-Share Matrix in order to verify farmers’
choices and expectations regarding downstream
paths of diversification in the FSC (HENDERSON,
1970); and 3) to evaluate the difficulties facing
Agriculture in its attempt to diversify its port-
folio, and offer suggestions about potential op-
portunities in this regard.
MATERIALS AND METHODS
This study utilises the EU-27 Supply matrixes
that reflect the primary characterising and sec-
ondary non-characterising production activities
of industries. Generally, survey results main-
ly concern enterprises with numerous second-
ary activities, and it is the principal activity of
an enterprise that determines its allocation to a
specific industry classification. The columns of
the Supply matrix present the production pro-
gram for each industry, including the output of
its primary and secondary productions. For each
bundle of products listed in the rows (following
CPA classifications), it is possible to find the in-
dustries that produce those goods as their pri-
mary or secondary production listed in the col-
umns. The principal activity or production of an
industry is reported on the diagonal of the Sup-
ply matrix while secondary activities are listed
off the diagonal (EUROSTAT 2008).
For the period 2000-2007, the European ta-
bles, published up to 2012, were using the NACE
rev 1.1 Classification of Economic Activities. Un-
til 2004 the geographical reference was EU-15
countries, and EU-25 or EU-27 thereafter. The
national accounts domain as a whole has imple-
mented the NACE rev 2. Classification of Eco-
nomic Activities (harmonised with UN ISIC rev.
4), and has applied this since the 2008 reference
year. The latest input-output tables were pub-
lished in 2013, and concern the 2008 and 2009
years for EU-27 and EA-17 countries. These ta-
bles have been built on the basis of the new in-
dustry classification.
The first part of this study refers to the activ-
ities (included in the NACE rev.2 classification
under Section A, Division 01) denoted as “Crop
and animal production, hunting, and related ser-
vice activities”, which encompass seven groups,
articulated as follows: 01.1 Growing of non-per-
ennial crops; 01.2 Growing of perennial crops;
01.3 Plant propagation; 01.4 Animal production;
01.5 Mixed farming; 01.6 Support activities to
agriculture and post-harvest crop activities; and
01.7 Hunting, trapping, and related service ac-
tivities. These groups are then further articulat-
ed in 25 classes (EUROSTAT, 2008a). Secondary
activities/productions are all those which are
not included in the above definitions, and which
are appropriately classified under other indus-
tries/groups of products, according to the same
NACE rev. 2/CPA classification.
After having calculated the economic impor -
tance of primary and secondary Agriculture pro-
duction for EU-27 (2009), articulated by the core
competences of industrial sectors, the method-
ology of BCG has been applied. This last con-
sists of the construction of a Growth-Share Ma-
trix (GSM), modified appropriately for the pur-
poses of this study. For EU-27 in the 2000-2007
period (adopting the old NACE rev. 1.1 classifi-
cation), the compound growth rate of each ex-
Ital. J. Food Sci., vol. 26 - 2014 453
tra-agricultural production (y-axis of the GSM
graph), as well as the logarithm of its share (in
%) of agricultural secondary production (x-ax-
is of the GSM graph), has been calculated for
2007. This is an alternative application of GSM,
since the aim is to establish the position of ag-
ricultural secondary activities in the farmers’
portfolio rather than their competitive position
in the destination market. However, the results
obtained have allowed the classification of Agri-
cultural secondary production under the 4 clas-
sical typologies from left to right on the graph,
being: a) ‘Stars’, which are fast-growing invest-
ments by Agriculture outside its core business
which have a high impact on its secondary activ-
ities. A star might only be cash-neutral, despite
its strong position. Large amounts of investment
may be required to defend their position against
competitors; b) ‘Question Marks’ are fast-grow-
ing investments with low share of Agricultural
secondary production. Substantial net cash in-
put is required to maintain or increase their pro-
duction share; c) ‘Cash cows’, that have a high
secondary production share, but are slow grow-
ing. These should generate substantial cash in-
flows ready for use in other investments; and d)
‘Dogs’, that are secondary productions with low
production share and slow-growing investments
which generally regard mature product in the
final phase of life-cycle. These investments tend
to have a negative cash flow, which is likely to
continue. However, these typologies are only the
result of past investment trends by Agriculture
in specific extra-agricultural activities. They do
not provide indications of a farms’ capability
to successfully develop new strategic paths for
further downstream diversification in its portfo-
lio of secondary products in the FSC. To over -
come difficulties, there is a need for the height
of the entry barriers in the destination markets
to be determined through specific indexes that
are described below. In the literature there are
other barrier indexes, but these are not suita-
ble for the purposes of this study (ORR, 1974;
MANN, 1966). The originality of the Chang in-
dices (compare CHANG and ISEPPI, 2012) is es-
sentially that: (i) each industry/country is com-
pared using a reference system of economic or
geographical average behaviour; (ii) the symme-
try is fundamental: it considers both the insu-
lation ability of each sector in building up entry
barriers, and the invasion ability of other sec-
tors to enter the core business area of the ref-
erence industry; and (iii) it also highlights the
balance between the performance of entry barri-
ers and the invasion ability. These indices have
been applied in order to determine whether the
markets of industries into which Agriculture is
entering and hoping to expand market share
have high or low entry barriers that prevent or
allow penetration. These indices allow for both
an ordering among individual sectors and indi-
vidual countries, and for the investigated phe-
nomena to be measured. For each country (and
for the complex of countries), the Supply ma-
trix is taken by product and by industry. For a
given industry i (n is their number), Pi denotes
the proper production (namely the production
in the industries’ primary field of competence),
Si represents the industries’ secondary produc-
tion in all the remaining group of products, and
Ai is the total secondary production of all the
other industries involved in the core business
of the given industry i. It is necessary to nor-
malise the indexes, specifically:
pi is Pi normalised by (1)
ai = Ai normalised by (2)
si = Si normalised by (3)
The first index is the Chang Entry Barrier In-
dex:
(4)
The value ranges from -1 to +1. If ai = 0, no
penetration happens, hence the index attains
the maximum +1. The minimum -1 represents
a theoretical case limit in which the entire pro-
duction of an industrial sector is the secondary
of the other sectors.
The second index is the Chang Invasion Index.
This compares the differences between exter-
nal secondary activities and internal (incoming)
secondary activities, and normalises them with
the whole of the balance of secondary activities
for all the sectors.
The Chang Invasion Index is:
(5)
(refer also to index 13 in CHANG and ISEPPI,
2011). The index ranges from -1 to 1.
“Of course negative values mean that the
invasion undergone by the industry is greater
than the penetration it performs, 0 (zero) means
balance, positive values mean that it expands
more than it is invaded. Thus the index is not
only connected to entry barriers, but also tied
to the capability or interest to overcome the en-
try barriers of other sectors” (CHANG and ISEP-
PI, 2012).
454 Ital. J. Food Sci., vol. 26 - 2014
RESULTS
In the EU-27 whole economy (2009), total do-
mestic production at basic prices amounts to
€22,028.66 billion. Adding imports of €1,465.66
billion and Direct purchases made abroad by
residents, and Subtracting the Cif/fob adjust-
ments on imports, it is possible to obtain a fig-
ure for EU total supply of goods and services of
€23,649.94 billion, including exports. In respect
to domestic production, the percentage share of
primary production, corresponding to the sum
of core business activity of every industry, ac-
counts for 92.6% of the total production, with
a total value of €20,398.84 billion. EU-27 Sec-
ondary production amounts to only €1,629.82
billion, corresponding to 7.4%.
In this context, the industry named by NACE
rev. 2 as “Crop and animal production, hunting,
and related service activities” (hereafter Agricul-
ture) has a total production of €350.42 billion, of
which €327.16 billion pertains to primary pro-
duction (93.36%), and €23.25 billion (6.64%) to
secondary production. As can be seen, the in-
cidence of primary production of the Agricul-
tural Industry is above the EU average (93.36%
vs. 92.6% respectively), whilst the contrary is
the case for secondary production (6.64% vs.
7.4% respectively). This implies that Agriculture
is less able and capable to undertake activities
outside of its core business than the mean for
the economy as a whole. At the same time, the
group of products (CPA), named Products of ag-
riculture, hunting, and related services (here-
after Agricultural Production), derives its total
production from the activities of both Agricul-
ture and all other industries. The value at ba-
sic prices of agricultural products produced by
other industries amounts to only €3.36 billion,
being only 1.02%, of total Agricultural produc-
tion, whilst Agriculture produces the overriding
part (98.98% vs. 92.60% of the whole economy
production). This is a clear signal that agricul-
tural activity is very difficult to undertake, and
that exogenous and endogenous barriers to entry
in the agricultural core business are very high.
In synthesis, EU Agriculture has the potential
to enter the field of primary activity of other in-
dustries, but until now it has not even been able
to achieve the average share of diversification of
the economy as a whole. In the meantime, the
above result demonstrates that entering farm-
ing’s core business is very hard for most firms.
Regarding the diversification of the Agricultur-
al industry, ten groups of products absorb the
major part of its efforts, considering those that
furnish at least 1% of its secondary production
(Table 1). These product groups represent 94.8%
of Agriculture secondary production, whilst the
remaining 55 groups of products together rep-
resent only 5.2%.
The principal fields of secondary activity in
EU-27 Agriculture are Food, beverages, and to-
bacco products, whose value in this field are
worth €15.83 billion, being about 68.1% of farm-
ers’ total Secondary production. This is a sig-
nal that European farms are pursuing an obso-
lete model of downstream vertical integration,
already dismissed by the same manufacturers
who now identify the most lucrative downstream
activities specifically as services provision rath-
er than transformation of raw materials such as
agriculture. This is the profit imperative! (WISE
and BAUMGARTNER, 1999).
Table 1 - Agricultural Industry Secondary and Primary Production in the Supply Chain (EU-27, 2009).
No Code Secondary Products (CPA) Million %
of Agricultural Industry of Euro Share
5 CPA_C10-C12 Food products, beverages and tobacco products 15,830 68.08
36 CPA_I Accommodation and food services 1,265 5.44
27 CPA_F Constructions and construction works 1,178 5.07
51 CPA_N77 Rental and leasing services 981 4.22
29 CPA_G46 Wholesale trade services, except of motor vehicles 967 4.16
and motorcycles
31 CPA_H49 Land transport services and transport services via pipelines 461 1.98
60 CPA_R93 Sporting services and amusement and recreation services 424 1.82
54 CPA_N80-N82 Security and investigation services; services 367 1.58
to buildings and landscape; office administrative,
office support and other business support services
24 CPA_D35 Electricity, gas, steam and air-conditioning 339 1.46
40 CPA_J62_J63 Computer programming, consultancy 226 0.97
and related services; information services
Agricultural Industry main elds of activities 22,038 94.78
Other industries < 1% on the Total 1,214 5.22
Total Secondary Production 23,252 100.0
Principal Production 327,163
Total production of Agricultural Industry 350,415
Ital. J. Food Sci., vol. 26 - 2014 455
Moreover, Agriculture performs downward
vertical integration with some service activities,
but only marginally, and only in the fields in
which it has some sort of traditional experience
either in a conservative frame or in up-to-date
evolution. These activities are: Accommodation
and food services; Rental and leasing services;
Wholesale trade services; Land transport servic-
es and transport services via pipelines; Sporting
services and amusement and recreation servic-
es; Security and investigation services; Services
to buildings and landscape; Office administra-
tive, office support and other business support
services; and Computer programming, consul-
tancy and related services and information ser-
vices. Construction and construction works are
also in the experiential tradition of agriculture,
while the activity of Electricity, gas, steam, and
air-conditioning is a newer field of activity, en-
couraged by strong incentives for Green Energy.
This is the state-of-the-arts Agriculture Portfo-
lio. The above reported activities, considering that
farmers are mainly conservators, are expected to
be considered for further expansion, although the
effects of the economic crisis has lead to a general
contraction that may upset current trends. There
are, however, also innovators among farmers who
are considering going deeper into the SC down-
stream. Like smart manufacturers, they may cre-
ate new business models to capture profits at the
end of the value chain, and to provide steady ser-
vice-revenue by processing, packaging, and mar-
keting commodities and service (Piccinini et al.,
2015). This would allow them to capture a larg-
er share of income in subsequent phases of SC
(HOLLAND and BRUCH, 2010). From the classifi-
cation of the Growth and Share Matrix built on
EU-27 figures for Agriculture in the 2000-2007
period, the composition of its Secondary produc-
tion portfolio results in Fig. 1:
1 - the Food and beverages industry is the
main source of cash flows, having been classified
as a Cash Cow, while still having great potential
as a Star. It is a safe investment, although it is
growing to a lesser extent than other secondary
activities of Agriculture. On the other hand, its
cash flow can provide funds for further invest-
ments, such as in the areas of quality wines for
direct sale, and of luxury farmhouses for rural
tourism (RIZZO and GIUDICE, 2013). It also ap-
pears (Table 2) that the “Food and beverages” in-
dustry has medium-high barriers to entry but
this notwithstanding, it is being invaded by other
industries. The reason could be that this indus-
try is heterogeneous and, especially in the field
of experience goods, niches arise in its market.
This is the case with the invasion of Agriculture
and its quality wines and olive oils;
2 - Land transports, Real Estate and Other
Services are Dogs that Agriculture is now reduc-
ing in its investment plan. Although these are
markets with low barriers to entry and are sub-
Fig. 1 - Growth and Share Matrix of Secondary Production of EU-27Agriculture (2000-07). Source: Authors’ elaboration on
Eurostat data.
456 Ital. J. Food Sci., vol. 26 - 2014
ject to being invaded (the former) or heavily in-
vaded (the other two) by new entrants (Table 2),
these activities proceed at much lower costs be-
cause they are operated by well-structured con-
solidated incumbents;
3 - there are no activities in Stars for which
Agriculture should aim to find more Cash Cows
to be milked for future investments;
4 - Question marks are numerous, namely
the investments made by agriculture to diver-
sify its portfolio of assets, which are growing at
a rate higher than average and represent a real
opportunity, albeit at different levels of develop-
ment and portfolio share. Those which deserve
to be examined for their relevance are Hotel and
Restaurant (HOTREST) and Recreational, cul-
tural and sporting services (RECREAT) which
are on the borderline of being Stars as they are
the most dynamic in terms of growth, and it is
upon these that EU agriculture focuses its invest-
ments. HOTREST has low entrance barriers and
a very high predisposition to be invaded; in con-
sequence, Agriculture should have no problems
to further expand its sphere of influence in ru-
ral tourism. RECREAT has, on the contrary, high
barriers to entry and is an invader of other activ-
ities, but Agriculture has the means to circum-
vent these barriers since it possesses land and
infrastructures to develop this type of activities
(CHANG et al., 2013). Among the other Question
marks, namely Rental, Wholesale, Construction,
Retail, Forest, and Other business services, only
the first two have resisted the economic crisis to
remain among the Question marks, while all the
others have slipped down into the Dogs’ domain.
The “real estate bubble” has negatively affected
some secondary activities of Agriculture because
they do not have enough market share to face,
through economies of scale, the challenge of the
incumbent crisis. From 2007 to 2009, the num-
ber of Question marks dropped from 9 to 5, and
this has frozen some agricultural expectations.
CONCLUSIONS
The managerial implications of this study are
the following: firstly, it confirms the idea that en-
tering farming’s core business could be very hard
for newcomers. In a stagnant market, high entry
barriers and stability may influence firms, help-
ing them to adopt a long-term viewpoint. This is
the strategic element required to optimise rents
deriving from firms’ market share (RUMELT and
WENSLEY, 1981; WERNERFELT, 1982). Second-
ly, it emerges that EU Agriculture has below av-
erage capabilities to engage in activities outside
of its core business area. Consequently, specific
measures aimed at empowering ancillary busi-
nesses should be adopted. This could be done
by, for example, empowering internal operations
with the implementation of pre and post-sales of
in-farm services in order to familiarise and raise
Table 2 - Classification of the markets in which EU Agriculture performs its Secondary production.
Source: Authors’ elaboration on Eurostat data.
Classication
Industries/Groups of products Chang Entry Position of Barriers in the Chang Invasion Position as Invader in the
Barriers EU Economy Index EU Economy Barriers Capacity to
Index Ranking (Quartile) Ranking (Quartile) Invade/ Being invaded
Products of agriculture, hunting and related services 45 I 47 I Very High Strong Invader
Electrical energy, gas, steam and hot water 39 I 52 I Very High Strong Invader
Construction work 22 II -12 IV High Heavily invaded
Recreational, cultural and sporting services 21 II 33 I Medium High Strong Invader
Products of forestry, logging and related services 18 II 2 III Medium High Invaded
Food products and beverages 15 II -4 III Medium High Invaded
Real estate services 0 II -65 IV Medium Low Heavily invaded
Hotel and restaurant services -3 III -28 IV Medium Low Heavily invaded
Land transport; transport via pipeline services -7 III -4 III Low Invaded
Retail trade services, except of motor vehicles -10 III 21 III Low Invader
Other business services -18 III -52 IV Low Heavily invaded
Wholesale trade and commission trade services -27 IV -3 III Very Low Invaded
Other services -33 IV -43 IV Very Low Heavily invaded
Renting services of machinery and equipment -40 IV -65 IV Very Low Heavily invaded
Ital. J. Food Sci., vol. 26 - 2014 457
awareness of new clients about its products, and
deepen their knowledge of existing product-us-
ers respectively.
The final consideration is that if farms, par-
ticularly small and medium-sized, want to devel-
op the scope of their direct sales in Retail, they
must lean on Food, Hotels and Restaurants, and
Recreational Activities, to create integrated pro-
jects to exploit their structures and take advan-
tage of the conveyance of clients in proximity to
wine and agro-tourism farms and to recreational
estates. For example, the structures needed for
the direct sale of goods and services require min-
imal investment and light facilities, and may be-
come customer attractors. An empowered attrac-
tor can be an event marketing centred in rural ar-
eas, representing a fusion of the four groups: food
& wine goods and services, entertainment, and re-
tail trade. This has the advantage of concentrat-
ing the commitment of the farmers on the non-
agricultural field in a short time, and of bringing
a number of new potential customers. As McLu-
han says in regards to these events, ‘the medium
is the message itself’; that is to say, the public es-
sentially requires choral participation, and at the
same time creates business (MCLUHAN, 1964).
The previous analysis indicates that farms, al-
though following a traditional downstream model
of vertical integration, may innovate along new
paths in the mainstream of their secondary ac-
tivities. Transactional resources such as inter -
firm trade contacts (DROLI et al., 2013) could
help Agriculture to leverage highly lucrative mar-
kets in its portfolio such as Food, Hotels, Res-
taurants, and Recreational activities, to set up,
plan, and organise productive business allianc-
es (cooperation in competitive markets, partner-
ship-based objectives, etc.).
This study does not intend to push the anal-
ysis beyond the important aspect of cash flows.
Rather, it creates the necessary framework to
make future investigation possible.
ACKNOWLEDGEMENTS
The authors wish to thank Livio C. Piccinini for methodo-
logical suggestions and helpful comments and Sandro Cloc-
chiatti for the collaboration in the construction of the 27 EU
countries complex database.
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